Hedging with Credit Derivatives and its Strategic Role in Banking Competition

Thilo Pausch and Gerhard Schweimayer ()

No 260, Discussion Paper Series from Universitaet Augsburg, Institute for Economics

Abstract: The tremendous growth of markets for credit derivatives since the mid 1990's has raised questions regarding the role of these instruments in the banking industry which is heavily exposed to credit risk. However, while recent literature mainly focused on pricing and optimal decisions regarding volumes of credit derivatives the present paper centers the strategic role of these instruments in the competition between banking firms. We use a duopolistic version of the industrial organization approach to banking to find out that credit derivatives may influence banking competition. For this result to hold observability of the volume of credit derivatives held by banks is not necessary.

Keywords: bank; risk; duopoly; hedging (search for similar items in EconPapers)
JEL-codes: D21 D40 D43 G21 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin, nep-mic and nep-rmg
Date: 2004-03
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